Tuesday, December 19, 2017

A Bubble About Nothing

What if they had a bubble about nothing?

Another interesting article from The Wall Street Journal, but this time, not a WTF? story, but real financial journalism.  A company is selling cryptocurrency coins, not stock, but the coins cannot be used for anything, and buyers have to agree that they serve no function whatsoever.   People are snapping them up.   The WSJ obliqilely notes that the company appears to have sketchy foundations, with a number of people working from home, but no names or resumes of the people working there.  They could be stock photos for all we know.

And the end product, some sort of software foundation, is not going to make money by itself, but be adopted by the major players in the industry, although none have committed to this - or perhaps even heard of it.  The CEO claims the release of this software or whatever it is, will be "bigger than Windows."   Modest claims, indeed.

The Journal doesn't come right out and say this smells of fraud, but they give a lot of hints.   A company where everyone works from home - but they don't have names or CV's of the employees on the website?   Coins or tokens that you buy, but have to agree have no function?   Wild announcements that this is going to be..... the next big thing?

Ahhhh..... the next big thing - always what the plebes are chasing after, like the brass ring on the carousel.   By the way, have you ever done that?  Grabbed for the brass ring on a carousel?   Probably an outdated metaphor for most younger people today.   When I was in my 20's, they had an old-fashioned carousel at the mall in Washington, D.C., in front of the Smithsonian "Castle".   If you could grab a brass ring out of this contraption while you were spinning around, you got a free ride.   I got one, but nearly lost a finger in the process.   It was not very safe.  I doubt they still do this sort of stuff anymore.   But I digress.

The Next Big Thing, is actually the official motto of the Elio Corporation, which if you can believe it, is still trading at about $2 a share.  This was a company with a cockamamie business plan, a car that no one would want to buy and could never be made, that is now basically bankrupt - with little cash on hand, and needing hundreds of millions more to even start production.  The stock should be trading for pennies.   Who in their right mind is paying over $2 a share for nothing

Worse yet, tens of thousands of people put down "non-refundable deposits" on these non-existent cars - people who could ill-afford to lose $500 or $1000.  They will never see their money again.   And like with this new vapor-coin, the depositors had to agree that their money was only for a "place in line" for a car that would never see the light of day.   One depositor tried to sue - and was rebuffed by the judge - it was all in black-and-white in the contract.

And that is the problem with investing, back in the day, and these days.  As I noted before, you can put out a prospectus that says, "We plan on squandering the investors' money on hookers and cocaine, and spend the rest on gambling in Vegas" and that would be legitimate.   It is beholden upon the investor to read the prospectus and understand what they are investing in.   So long as you are honest about your stealing, it ain't stealing.

Never invest in something you don't understand.   And if someone tries to explain some complicated investment to you and you don't "get" it, odds are, it is not because you are dense or stupid, but that the investment is a scam.

Act rationally in an irrational world is another one of my mantras.   You don't need to be a freaking genius, just not a blithering idiot, and there are idiots everywhere - look around you.   A reader writes that my technique for investing will never make him an internet Billionaire.   And he's right.  But very few people become internet Billionaires, and those that do, don't do so by buying stocks hyped on television at the retail level.

Want to make money on Facebook?  Change your name to Zuckerberg and buy a time machine.   You won't be his level of rich buying Facebook stock - or any stock for that matter, on the exchanges.   The insiders, the founders, the people with the money are the ones who make the money.   The chumps who buy stock from these people are the ones who usually lose money - or if they are lucky, make paltry amounts (and no, doubling your money isn't some big deal - any reasonable investment should do that every 7-10 years).

Want to make money in Bitcoin?  Gold?  Again, you'll need that time machine.   Or be the one selling gold to others and take a commission.  Or run one of these "exchanges" where you make money on each transaction, regardless of whether cryptocurrencies go up or down.   It is like the gold rush of the 1800's.   The gold miners almost all went bust.   Levi Strauss made a fortune selling them blue jeans and mining supplies.   That's where the real money is.

Over the Centuries there have been bubble after bubble.  The real bubble fanatics, however, argue that bubbles never happened, but rather are an example of a rational market valuating commodities.  And I suppose in this "post-truth era" you can get away with saying that, but of course, it isn't actually true.  The tulip bubble, the railroad bubble, the stock market bubble of '29, the gold bubble of '74 and '81 (and today), the real estate bubble of '89 and '08, the tech stock bubbles of (fill in the blank!) and the cryptocurrency bubble of today.

Except today is different.   Previous bubbles were about things - tangible things that people bought and sold.  Even Ponzi was selling postal orders, or had a scheme to do so.   But today?  We are having a bubble about nothing - cryptocurrencies, which are really of no use to anyone, and in fact, are not really being used for monetary transactions.   People are investing in them just because and then hoping they go up in value, because everyone said they would.

Do these cryptocurrencies have any real value?   Yes, to bad people.   If your name is Ahmed, and you want to declare Jihad on infidels, you can send Bitcoin to Kim Jong, who in turn will send you case of AK-47's.   You don't want to send a money order, as the infidels can track your bank accounts and seize money.   So you sell a goat, buy bitcoin, and have arms shipped from North Korea.   Everyone is happy - well, except for the infidels.

Of maybe your name is Larry and you want to deal fentanyl.   You can't wire money from Missouri to the Tongs in China, as the DEA will catch on to you.  But you can send bitcoins, and get your drugs in the U.S. Mail (no really, it is that stupidly easy).   Everyone is happy, again, except all those people who O.D. and die as a result.

Or maybe your name is Dimitri and you want to traffic underage girls from the Ukraine to the U.S.  You hire them telling them they will have cushy jobs as nannies for wealthy New Yorkers, but instead you put them in a shipping container bound for Baltimore, where they are prostituted.   How do you get the money back to the home country?   Again, Bitcoin to the rescue.  You buy Bitcoin, send it overseas, where is it converted to local currency.

The problem, of course, is that it takes upwards of 300 minutes (that's five hours) to complete these transactions, so it gets cumbersome - and you have to hope the market doesn't fluctuate too much between the beginning and end of the transaction.   But the real problem is, of course, you are doing illegal things, and governments are not going to sit by idly and let you get away with this.

Already the Chinese are cracking down, and it won't be long before the U.S. government does likewise.   I noted before how I was treated like a criminal when I tried to wire money (using the SWIFT system, bank-to-bank) overseas once - and the irony was the clerk who basically accused me of terrorism was wearing a hijab at the time.   PayPal and Western Union seem to be less regulated, although I am sure NSA has hooks into both.   You want to send $100,000 to Pakistan by Western Union, someone is going to knock on your door.

So how long before these cryptocurrencies are regulated?   And how long before trade in them is regulated?   And if the only "legitimate" purpose behind the currencies is illegitimate, then what happens to them when they are regulated and can no longer be used to buy guns, drugs, and children?

People aren't thinking of this.   People are, by and large, idiots.  They see someone else making money at something or at least appearing to do so, and they want to jump on the bandwagon.   Monkey-see, monkey-do.

And since everyone today has to be an investor as pensions are obsolete, then there is a lot of money to be made in selling crappy "investments".   In fact, some are saying that the stock market is overheated simply because there aren't enough stocks left.   Private equity investors have taken many companies out of the market, leaving fewer stocks to buy, and lots and lots of investors clamoring for return on their investment.   It is an environment ripe for fraud.

It is all-too-easy these days to sell stocks or coins or whatever, and people will snap them up without investigating very much.   It has taken on a religious-like fervor, much as the housing market did last time around, much as the gold market did a few years back, when prognosticators said it would hit $5000 an ounce.   The raging true-believers shout down any dissent, just as they would shout down this posting, if they even bothered to read it (and you can bet the words "fiat currency" would appear in the first sentence - it is a buzz-word, just like "blockchain" is - say it three times and it means something, or so it seems).

The wreckage of previous bubbles in history often produced some positive residual results.  While investors lost their shirts, often the wreckage was salvaged and provided low-cost opportunities for the next generation.   The railroad bubbles of the late 1800's resulted in a lot of low-cost rolling stock and track available for the remaining railroads to expand.  The tech bubbles of the 1990's and 2000's meant a lot of cheap servers, fiber optic capabilities, and cheap rent in silicon valley for a new generation of companies to grow and expand (and produce products and services that would have been uneconomical before).   The housing bubble wiped out millions of people, but put a lot of housing stock on the market at low, low prices - for smart investors to snap up and rent out.

But the cryptocurrency bubble?   I am not sure there will be much to salvage from the wreckage of this one - because there is nothing there.    Something that is being valued simply by the laws of supply and demand isn't inherently worth anything, if it has no ultimate legitimate use.   And once people realize the supply of cryptocurrencies is indeed infinite, demand will falter, as indeed there is no such thing as infinite demand for any commodity, real or imagined.

UPDATE: the block.one initial coin offering turned into a bust. The SEC fined them 24 million dollars for doing an unregistered offering which was a slap on the wrist considering they raised four billion dollars. The investors have since sued the company and the value of the coin has dropped 85%. It doesn't appear that has been widely adopted as they claimed it would be, or was the greatest thing since windows.

Some people decry the SEC, claiming that these fines are just trivial and don't protect investors. However Caveat Emptor. If you want to invest in something crazy like cryptocurrency, you're on your own. You're expected to be a grown-up and understand the risks involved. And as the prospectus indicated, the coins were worth absolutely nothing and had no purpose until the currency could be released which apparently it never was. So you have to read the prospectus.

I have noted time and time again, that you could issue stock in a company and in the prospectus say that the purpose of the company is to have a good time and that you intend to spend all the investors' money on cocaine and hookers. This would be perfectly legal, provided that you put it all in the prospectus. The onus is on the investor to read the prospectus and understand what they're investing in.